India is withdrawing retroactive tax – better late than never
August 24, 2021
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The Tax Law (Amendment) Bill, 2021 (“Change in 2021“), which was passed by Lok Sabha, will reverse the retroactive taxation introduced by the Finance Act of 2012 (“Change in 2012The 2012 amendment provided for retrospective taxation of income from the sale of shares in a foreign company that derived its value, directly or indirectly, essentially from assets located in India. A company was considered “essentially” derived. from assets located in India if the value of those Indian assets exceeded ten million rupees and represented at least fifty percent of the value of all assets held by the foreign company
With the 2012 amendment, the above clarification was considered effective with the promulgation of the Income Tax Act on April 1, 1962. This meant that all transactions involving a transfer of shares or interests in overseas companies that derive significant value from the Indian assets would be subject to capital gains tax in India and interest would be charged for late payments from the date the tax was due. This allowed Indian revenue to collect tax claims on all transactions made at any point in the 50 years prior to the 2012 change, which clearly turned Smith’s cannon of tax security on its head.
The 2021 amendment finally corrects the errors of the 2012 amendment by removing its retroactive effect. It provides that for any transfer of shares or interest abroad that occurred before the date of the change in 2012, i.e.
Post-taxation, follow-up claims, totally avoidable domestic litigation, and international arbitration have generated severe criticism and embarrassment for the government. After the 2012 amendment, claims were made in seventeen cases. Of these, two were suspended by high courts and four were arbitrated under bilateral investment treaties. In two ongoing arbitration proceedings (by Cairn Energy Plc and Vodafone Group Plc), international arbitration tribunals have ruled against the government, further demonstrating the injustice of retroactive taxation in a modern constitutional democracy.
The 2021 amendment finally gives the government the opportunity to correct its course and to limit the damage it urgently needs. It provides that all tax rulings based on the 2012 amendment will be voided if the taxpayer agrees to withdraw all legal proceedings against such rulings in India or abroad and makes an obligation to waive his or her rights, such remedies or claims to assert against the government India or overseas. If the taxpayer elects to take advantage of such cancellation, any tax return issued under the 2012 amendment would be canceled and any amount paid by the taxpayer under the 2012 amendment would be refunded without interest.
The 2021 amendment will probably come 9 years too late, but luckily it is a case of “better late than never”. The reversal of the retrospective effect of the 2012 amendment, the lifting of pending claims, and the offer to refund the amounts collected, all indicate that the government lost far more than it expected through an act of law overturning the Colonel’s decision Court in favor of Vodafone. If Cairn agrees to invoke the nullity provisions and cease enforcement proceedings against international government assets (e.g. aircraft and Air India foreign property), it will allow the government to avoid further embarrassment.
Eventually, it will help restore the tax security and credibility of the Indian legal system to international investors and attract larger foreign investment as the country recovers from the devastation of Covid19.
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